Pre-Seed Valuation & Fundraising Trends in Q2 2023
It has been an interesting period for startup fundraising, which has attracted more speculation and media attention than ever before. We couldn’t have asked for a better environment in which to launch the Startup Valuation Delta quarterly, a dive into our data on valuations, fundraising and startup financials; a chance to reflect on how recent economic events and private market trends have impacted fundraising around the world.
As we enter Q3 2023, we can see that early stage valuations have continued a steady and modest upward trend over the past two and half years. This is to be expected, as these companies are largely insulated from macro-economic conditions and market shocks. A pre-seed company trying to acquire its first 100 paying customers isn’t going to be impacted too significantly by rising interest rates or fears of a recession. Broadly, valuations continue to rise as technology evolves and is better understood and market sizes gradually increase.
What we can see happening around Q3 and Q4 of 2022, and rippling into Q1 of 2023, is a dip in valuations which probably reflects the peak of ‘fear’ around what was happening in venture capital, and whether or not there would be sustained capital availability for early stage companies. This fear might have encouraged the companies who could afford to (broadly, higher valuation scenarios) to delay their raise until we started to see a bit more optimism at the beginning of this year.
Q2 2023 Pre-Seed by Region
Looking at some of the international markets, it’s important to consider where their capital originates. For example, the recovery of valuations in Latin America might have be slower due to investors in the US and Europe (who diversified into emerging markets during 2019-2022) pulling back to focus on home markets. Additionally, some markets such as the Middle East had a slightly slower exit from COVID, which might have led to a longer period of suppressed valuations – followed by a rapid recovery which then ran face-first into the VC-pessimism.
Q2 2023 Pre-Seed by Industry
In addition to the regional differences, the influence of the past few quarters can be seen on how valuations have been shaped across different industries. Sectors like Food & Beverage or Consumer Goods have had a tough time thanks to the increased cost of living squeezing the spending power of consumers. At a time when investors are having to think much more critically about where they invest, luxury or convenience products are going to have a harder time. Conversely, Renewable Energy is a key focus given the increasing global significance, and Finance (encompassing everything from banking to insurance) remains a leader.
Understanding these graphs: Rises or falls in valuation are largely indicative of the enthusiasm or optimism around new technologies, or perceptions of how founder-friendly the market has become. Capital requirements are shaped by dilution, so generally correlate with valuation though a non-correlated change could indicate the market shifting to more or less capital intensive companies (e.g. SaaS vs hardware).
Startup valuation around the world
Pre-Seed Revenue Projections ($USD)
Perhaps the least surprising finding in our analysis of early stage revenue projection is that US companies give a much more ambitious picture to investors. As a trend, US based pre-seed startups have TTM revenue of $250K and go on to project almost $20M by year three. European startups begin with slightly more modest TTM revenue of $156K and project close to $10M by year 3.
There’s a couple of factors at work here. In a practical sense the US is simply a large and more homogenous market for founders. It is easier to expand across the US without legal and regulatory hurdles – not to mention the difficulties of dealing with cultural and language barriers. In addition, it’s fair to say that European founders and investors are inclined to a more conservative outlook on the future. They prefer to set the bar lower, and attempt to overdeliver.
Revenue projections represent the anticipated income generated by the sale of products or services, serving as a key indicator of business performance and growth potential. These projections provide insights into a company’s financial viability and potential returns.
Understanding these graphs: These metrics are indicative of the stability and optimism in a market.
Revenue projections around the world
About Equidam's Startup Valuation Delta Quarterly
As the leading provider of valuations to early stage companies, we provide…
- Valuations with an open, standard methodology, focused on determining fair value
- Context on valuation data with associated capital requirements, revenue and EBITDA forecast data
- Coverage of established markets such as the US and Europe, as well as emerging markets like Africa and Southeast Asia.
These indicators collectively offer an understanding of the financial landscape and sentiment surrounding startups.
By examining these trends collectively, investors, entrepreneurs, and industry observers can gain insights into the overall health of the early-stage fundraising market. It helps identify emerging sectors, evaluate risk appetite, and make informed investment decisions. Additionally, analyzing these factors over time can provide a broader perspective on the evolving dynamics and trends within the startup ecosystem. Each quarter we will release our own analysis on this data, and what it implies for early stage fundraising.
Trends in startup valuation represent the perceived value and potential of emerging companies, reflecting investor confidence and market dynamics. However, these trends can vary significantly in different regions around the world.
- In the United States, the presence of a robust venture capital ecosystem, access to advanced technologies, and a large consumer market often lead to higher startup valuations. Europe, known for its strong support for innovation and startups, sees valuations influenced by factors such as access to capital, regulatory environments, and regional economic disparities.
- In Africa, while startup valuations have been growing steadily, they are influenced by challenges such as limited access to capital, infrastructure gaps, and a relatively smaller consumer base.
- The Middle East, with its focus on diversification and technological advancements, witnesses startup valuations influenced by government initiatives, availability of investment capital, and regional economic stability.
- Latin America’s startup valuations are shaped by factors like access to funding, political and economic stability, and regional market integration.
- Southeast Asia, a rapidly growing startup hub, experiences valuations impacted by factors including a large and diverse consumer base, availability of investment capital, and regional collaborations.
Ultimately, varying trends in startup valuations across these regions reflect the unique blend of economic, political, and cultural factors at play in each respective region.
Trends in startup valuation can also represent the perceived potential and market dynamics within specific industries, reflecting investor confidence and growth prospects.
- In the Food & Beverages industry, valuations may be influenced by factors like market size, brand recognition, and scalability potential.
- Renewable Energy startups, on the other hand, may experience valuations shaped by factors such as technological innovation, regulatory support, and the urgency to address climate change.
- Health & Medicine startups may see valuation trends affected by factors like breakthrough therapies, intellectual property, and the potential for disruptive healthcare solutions.
- In the Finance industry, valuations may be influenced by factors such as scalability, regulatory compliance, and the ability to leverage emerging technologies.
- Consumer Goods startups may experience valuation trends influenced by factors like brand differentiation, market demand, and the potential for rapid consumer adoption.
These industry-specific valuation trends have a direct impact on how much capital is being raised. Startups operating in industries with high growth potential and favorable market conditions tend to attract more capital, as investors perceive them as having greater chances of generating substantial returns on investment. Conversely, startups in industries with more limited growth prospects or higher barriers to entry may face challenges in raising significant capital, as investors may perceive them as riskier or less lucrative opportunities. Therefore, industry-specific valuation trends can greatly influence the amount of capital being raised by startups, as investors allocate their resources based on industry outlook, growth potential, and perceived risk.
Equidam calculates startup valuation by employing a data-driven and comprehensive approach. The platform considers various factors to derive a fair and precise assessment of a startup’s value. Equidam utilizes a combination of financial, market, and risk data, along with proprietary algorithms, to generate valuation reports. Financial data includes key metrics such as revenue, expenses, and growth rates, while market data considers industry benchmarks and comparable company analysis. Risk data evaluates the startup’s stage, team, intellectual property, competition, and market size. Equidam’s algorithms then analyze and weigh these inputs to calculate the startup’s valuation. By incorporating both quantitative and qualitative aspects, Equidam aims to provide an objective and reliable valuation estimate that assists founders, investors, and other stakeholders in making informed decisions. This standardised approach to valuation makes looking at industry or regional trends in valuation more informative.
Fair valuation for startups
By striving to make fair valuation easier to calculate, we hope to give the tools to both founders and investors to understand the value of the company and have a productive discussion about price. To allow them to navigate hype and downturns with confidence, to compensate their employees fairly and to make solid returns for all stakeholders.